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A reduction of capital has the advantage that it is not necessary to meet the requirements for the exempt distribution provisions (D6.422), such as where one of the companies in an investment company. It is also an attractive structure for companies that do not have sufficient distributable reserves to effect a dividend in specie.

It may be desirable to insert a new holding company above the original company to ease any creditor issues which may otherwise arise on the reduction of capital. A new holding company will also be required if the share capital of the original company is not large enough to cover the market value of the demerged company or business. This is necessary in order to avoid an income distribution for shareholders. Typically a new holding company would be inserted by a Court approved scheme of arrangement (see below). A holding company means one whose business (ignoring any trade which it carries on) consists wholly or mainly of the holding of shares or securities of one or more companies which are its 75% subsidiaries.

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